By Lisa Seachrist
WASHINGTON - Rep. Jennifer Dunn (R-Wash.) stands poised to introduce legislation this week that would exclude capital-gains taxes for individual and corporate venture capitalists who invest in small entrepreneurial firms.
Dunn is completing a list of bipartisan co-sponsors before submitting the bill to the House of Representatives for inclusion into any tax bill that is considered this year. Should Congress fail to pass a tax bill this year, there will be no vehicle to enact Dunn's legislation.
"The largest question is, will there be a tax bill in 1999?" said Chuck Ludlam, vice president of government relations for the Biotechnology Industry Organization (BIO). "But this bill is one of the most exciting proposals out right now. We think it's got a shot, and are certainly going to pursue it."
In preparing the bill, Dunn, whose district includes several biotechnology companies and software firms, is building on groundwork she laid during the waning days of the 105th Congress, when she introduced similar legislation to reduce the capital-gains tax on venture capital investments.
Dunn's current legislation has received a very favorable score from the joint Tax Committee, which means that the legislation won't put the balanced budget at risk because it will provide revenues to the government in the form of a stimulated economy.
The proposal calls for individual and corporate investors who invest in small companies to receive a 100 percent exclusion on their capital gains from that investment. That provision is up from the 50 percent exclusion in the current law and represents an increase from the bill Dunn sponsored late last year which would have provided a 75 percent exclusion. In addition, the bill will provide the capital gains exclusion for corporations as well as individuals who are covered in the current law.
Individuals and corporations would be eligible for this capital gains exclusion only if they purchased the stock directly from the company as part of founders stock, a public offering, private placement or stock options. Purchases of stock in the secondary markets would not apply. Also, the investors must hold the stock in an eligible company for at least three years. This reduces the length of time that the investor must hold the stock by two years from current law.
Dunn defined an eligible company as one that had a market capitalization of $300 million or less, which significantly increases the number of companies eligible. Dunn would also have that benchmark annually indexed to account for inflation. Current law limits eligibility to a $50 million market capitalization.
"This bill is obviously tailor-made for the kinds of investments that apply to our companies," Ludlam said. "It's a tax cut, [and it] really has a stimulative effect."
Ludlam quoted estimates that the tax cut would add $900 million to the governments tax coffers, as a result of stimulating the economy by encouraging investments in small entrepreneurial business. In addition, Ludlam noted that many Democrats have supported a zero percent capital gains tax on such investment in the past, so the idea isn't entirely foreign for them.